Jerome Powell has a goal that is greater than concern about short-term inflation in the bond market.
In his perhaps more direct press conference since he took over the central bank three years ago, the Federal Reserve chairman this week delivered three critical messages to investors who have been driving bond yields up with the bet that inflation would end for forcing its Fed to tighten monetary policy faster than it has indicated.
Read more: Powell maintains Dovish Line while the Fed signals zero rates until 2023
Powell messages? He is not unduly concerned about rising earnings, control of monetary policy communications lies with him and he is willing to keep the economy warm to help it recover from the consequences of Covid-19.
Market Rebuff
Asked directly during his news conference on Wednesday whether he was concerned about the increase in Treasury yields, Powell referred to financial conditions and said they remain “highly accommodative”.
It was a clear sign that he would not be bothered by the emotional fluctuations in the risk of inflation that beset investors. Powell has an explicit strategy to rekindle the economy and he doesn’t think it will be easy after decades of low inflation.
So he wants to see the real data and is not convinced that the inertia of inflation – where today’s price changes look a lot like yesterday’s – is about to change.
“The fundamental change in our structure is that we are not going to act preventively based on predictions for the most part and we are going to wait and see the real data,” said Powell. “I think it will take time for people to adjust to this and this new practice, and the only way to really build credibility on it is by doing this.”
Attacks of anger will catch your eye, however.
“I would be concerned about the disordered market conditions or a persistent tightening of financial conditions that threaten the achievement of our goals,” he added.
Enjoying the signal
Powell has repeatedly downplayed the Fed’s quarterly summary of economic projections.
“SEP is not a committee forecast. It is not something we sit and debate, discuss and approve, “he said, noting that the point graph of the interest rate forecasts presented by each of the 18 Fed legislators” was not meant to be really a promise or even a forecast when the committee will act. “
The forecasts exhibit a political response, if other assumptions made by individual employees work as expected.
But the forecast of a rate hike three years later, as seven Fed officials did, “is highly uncertain,” Powell dryly noticed, adding that no one had much experience in predicting how the economy will recover after a pandemic.
All of these comments intentionally devalued the political signal of the points. They also raised a question: if the guidance on the time of any tightening does not lie on the point graph, where is it?
Powell made it clear that he resides with him.
In the tightening choreography, the first step will be to reduce the $ 120 billion in monthly asset purchases that the Federal Open Market Committee has linked to “substantial advances” in employment and inflation.
Powell said it will be a trial, that is, a consensus of the committee that Powell himself is in charge of forming. “Until we give a signal, you can assume we’re not there yet,” he said.
Second term?
Taking charge of the message gives Powell an indispensable Alan Greenspan-like quality at a time when Fed communication is critical for financial markets and as the debate develops over whether he will get a second term when his current stint as president ends in February.
President Joe Biden has not yet indicated whether he is open to keeping him or choosing someone else.
“Powell would like to be reappointed and the Democrats kept the door open,” said Derek Tang, economist at LH Meyer / Monetary Policy Analytics in Washington. “If the Democrats were trying to get a favorable policy from Powell, they kept it at stake, but they didn’t guarantee it. It is a very sophisticated job negotiation. “
Bringing the heat
A third message came in the forecasts and how they will respond to unemployment. Taken together, the median of the combined outlook showed that inflation rose slightly above 2% this year, but fell closer to the target in 2022 and 2023.
Economic growth is advancing in 2021 thanks in part to fiscal policy, rising 6.5% and staying above the committee’s equilibrium growth rate of 1.8% for the next two years. Unemployment drops to 3.5% at the end of 2023, equaling the pre-pandemic level.
Despite all this heat, most employees still don’t see much need to raise interest rates.
The story here is that your “broad and inclusive goal” of maximum employment is in no way represented by the unemployment rate. Even at 3.5%, they estimate that there will be room for exploration, perhaps especially in the most affected segments of the labor market, such as women of working age and minorities.
Ready, Set … Go!
Fed officials are increasingly optimistic about the economy and the labor market, note firmer inflation
Source: Federal Reserve
Powell has focused closely on the unequal blow delivered by the pandemic and wants to get the 9.5 million Americans who lost jobs during the Covid-19 era back to work as soon as possible.
Although the unemployment rate fell to 6.2% last month, it rose to an impressive 9.9% for black Americans, despite the economy’s supposedly robust recovery.
Powell argues that since inflation expectations are anchored at 2%, the Fed can heat up the economy to deliver a more inclusive recovery without experiencing a sustained increase in prices.
“Unemployment is going to take a while to decrease,” Powell said, and here it is safe to say that he is thinking about the broader measures of unemployment. “The faster the better. We would love to see this happen sooner or later. We would not accept anything more than that. But realistically, given the numbers, this is going to take some time. “